Fannie Mae Fix Fades as Senate Democrats Split on Plans

Chances that Congress will move this
year to wind down or transform Fannie Mae (FNMA) and Freddie Mac are
dimming as lawmakers confront a split among Senate Democrats and
a change at the regulator of the mortgage finance companies.

A delay would mean Paulson Co., Fairholme Capital
Management LLC and others who have been acquiring stock in the
government-owned companies may have to wait a year or more to
learn whether Congress will preserve some value for private
shareholders or wipe out their holdings.

This year’s window for a housing overhaul is closing as the
leaders of the Senate Banking Committee — Chairman Tim Johnson,
a South Dakota Democrat, and Mike Crapo of Idaho, the ranking
Republican — work to complete a bill before members are
distracted by the midterm elections.

The panel’s Democrats remain at odds. Elizabeth Warren of
Massachusetts and Sherrod Brown of Ohio have said they won’t
back a plan unless it guarantees affordable loans for most
buyers. Senator Mark Warner, a Virginia Democrat, said expanding
the bill’s scope too much could undermine bipartisan support.

“What the administration and the chairman and the others
have to resist is trying in the Senate to move the bill too much
to the left,” Warner said at a Jan. 8 housing forum inWashington.

Consumer and housing advocates say there is less urgency
for a bill because the new head of the Federal Housing Finance
Agency, former Democratic congressman Melvin L. Watt, can enact
some policies aiding homeowners without legislation. They are
pushing Democrats friendly to their cause to hold out for a
measure that would ease credit for home buyers in all income
groups and help for low-income renters in multifamily homes.

Political Challenge

In the absence of congressional action, the federal
government will continue to guarantee most home loans, providing
a source of support to the mortgage market.

Reaching agreement on the future of Fannie Mae and Freddie
Mac (FMCC), which buy mortgages and package them into bonds, has been
one of the central challenges of Washington’s response to the
2008 credit crisis. The government-chartered companies have long
been political flash points, praised for expanding homeownership
and then reviled for accounting scandals, for accelerating the
subprime mortgage meltdown and for prompting a taxpayer bailout.

U.S. regulators seized Fannie Mae and Freddie Mac in 2008
as their losses on soured loans pushed them to the brink of
insolvency. They were subsequently propped up by $187.5 billion
in government aid.

Hedge Funds

While President Barack Obama proposed winding down Fannie
Mae and Freddie Mac three years ago, he didn’t release a
detailed plan. In the meantime, the companies, which still
guarantee about 60 percent of new U.S. home loans, began posting
record profits in 2012 as the housing market rebounded. They
have paid billions to the Treasury as dividends.

Their preferred shares have quintupled in price over the
past year as investors speculate the notes will have value when
the future of the companies is finally decided. Bill Ackman’s
$12 billion hedge fund, Pershing Square Capital Management LP,
said on Nov. 15 it bought almost 10 percent each of the
available common shares of Fannie Mae and Freddie Mac.

Fairholme, Perry Capital, and other shareholders have sued
the U.S. government, contending that investors deserve some of
the money being generated by Fannie Mae and Freddie Mac.

’Small Remnants’

Congressional efforts have focused on replacing the two
companies with a system in which mortgages are mostly backed by
private capital. The government would play a smaller role in the
market by taking a backstop position on mortgage securities,
stepping in only if private interests were wiped out by
catastrophic losses.

Hedge funds have lobbied to privatize the companies instead
of liquidating them so their investments aren’t worthless. No
lawmaker has yet come out in public support of that idea. “My
view that these shareholders likely won’t get a dime has not
changed — except possibly for small remnants, if there are any
left, once reform is finished,” Senator Bob Corker, a Tennessee
Republican on the banking panel, said Jan. 10.

In the Republican-controlled House of Representatives, a
bill that would almost entirely privatize the mortgage market,
written by Texas Republican Jeb Hensarling, hasn’t gained enough
support for a vote of the full chamber.

That leaves Senate Banking as the probable driver of an
overhaul. Even with some Republican votes, it’s unlikely a bill
could clear the panel without a majority of its Democrats.

‘Balancing Act’

“To get the progressive wing of the Democratic party you
have to convince them that the legislation is going to provide
for multifamily housing finance and offer a path to
homeownership for lower-income consumers,” said Jaret Seiberg,
policy analyst at Guggenheim Securities LLC’s Washington
Research Group.

Still, Seiberg said, if such measures greatly expand the
U.S. role in low-income housing, Republican support could erode.
A Senate bill that doesn’t include backers from both parties
would have little chance of gaining acceptance in the House.

“The more you move to the left the more you risk losing
the right,” Seiberg said. “That’s why this bill has always
been a giant balancing act.”

Wary Democrats

The split among Senate Democrats was on display after
Warner made his Jan. 8 comments. In a posting on the political
blog dailykos.com, Mike Lux, leader of the activist group
American Family Voices, said Warner’s remarks were “classic
playing of the DC centrism card to promote a bill that will
benefit Wall Street bankers a lot but will do serious harm to
middle- and working-class families.”

Lux’s group has been the beneficiary of fundraising appeals
from Warren. Warren, along with Brown and Bob Menendez of New
Jersey, declined to sponsor a mortgage-finance bill that Warner
and Corker introduced last year and which is serving as the
model for the measure that Crapo and Johnson are writing.

Warren said she is pushing for deeper government backing
for the housing market and assurances that low-income borrowers
and small lenders won’t be shut out.

“We need to make certain that any future housing finance
system preserves broad access to mortgages at reasonable rates
and terms,” Warren said in an e-mailed statement this week.

Brown, who has taken similar positions, is also advocating
for improved oversight of mortgage-servicing practices. “I’m
still a ways from signing on,” he said in a Jan. 27 interview.

Recess Looms

House Democrats also have been split on the best way
forward. John Delaney of Maryland, John Carney of Alabama, and
Jim Himes of Connecticut said Jan. 17 that they would soon
introduce a bill replacing Fannie Mae and Freddie Mac with a
public-private partnership. Maxine Waters, the senior Democrat
on the House Financial Services Committee, has said she is
working on her own legislation.

Congress has about six months to complete legislative work
this year before leaving for summer recess. When lawmakers
return in the fall, they’ll be preoccupied with the November
midterm elections.

Among Democrats, Watt’s arrival at FHFA this month is also
slowing the momentum for immediate action, said Isaac Boltansky,
a Washington-based analyst for Compass Point Research Trading
LLC. Watt replaced Edward J. DeMarco, whose limits on borrower-aid programs and emphasis on the companies’ bottom line earned
praise from Republicans and criticism from Democrats.

‘No Fear’

“There is no longer the fear of mortgage-credit
contraction through FHFA policy mandates,” Boltansky said.

The improving financial condition of Fannie Mae and Freddie
Mac has also helped quiet calls for change. Thanks to record
earnings the companies have paid a total of $185.2 billion to
the U.S. in dividends. Under terms of the takeover, that money
technically counts as a return on the government’s stake and not
as a repayment of the $187.5 billion bailout.

“There’s high danger of getting this wrong, with
catastrophic results, and there’s low pressure to do it
quickly,” said Mike Calhoun, president of the Center for
Responsible Lending, a consumer advocacy group.

“So all that leads us to think a slow, cautious approach
is best,” Calhoun said. “In normal times, a major bill like
this would be a 10-year-long process in Congress.”

To contact the reporters on this story:
Clea Benson in Washington at
cbenson20@bloomberg.net;
Cheyenne Hopkins in Washington at
chopkins19@bloomberg.net

To contact the editor responsible for this story:Maura Reynolds at
mreynolds34@bloomberg.net